In the latest legal settlement following the collapse of financial planning group Storm Financial, The Federal Court approved a settlement between Westpac and a group of Storm clients who had borrowed from the bank to finance their investments.
The proceedings were dismissed after Westpac agreed to pay $7.5 million to settle the claims of the group members. Westpac will pay an additional sum to the two applicants in the representative action, in compensation for their time and effort in bringing their action.
In all, four banks were the subject of class actions or proceedings brought by the Australian Securities and Investments Commission in the wake of the Storm collapse, and another two were involved in resolution schemes.
All the litigation was settled and all without any admission of liability by the lenders.
As a result, one of the issues that remains unresolved is whether the lenders were “linked credit providers” of Storm and were jointly liable for loss and damage suffered by investors.
ASIC argued in its claims against the banks that they were linked credit providers but this was never tested in court. Storm was a catalyst for regulatory changes that led to the FOFA reforms, including the introduction of a best interest duty, but the lined credit provider question remains unanswered.
The concept of a linked credit provider is set out in the Australian Consumer Law, which says a financier may be liable for the wrongful conduct of a supplier it has permitted, if not encouraged, to procure credit contracts that facilitate the supply of goods.
When ASIC filed proceedings against lenders, its claims included breach of contract, unconscionable conduct and the claim of liability as linked credit providers.
In a review of the litigation and regulatory action following the Storm collapse, Michael Legg, associate professor at the UNSW Law School, wrote in a Sydney Law Review article in 2016 that the ASIC proceedings were test cases on the liability of the banks based on novel causes of action, such as the lender being linked credit providers.
However, the fact that all the litigation was settled meant that no precedent was created.
“A settlement may still provide guidance, albeit in a weaker form. A significant settlement amount may indicate that there is merit to an allegation,” Legg says.
At the time of its collapse in 2009, Storm had 115 staff, 14,000 clients and $4.5 billion of funds under administration.
Its business model was a one-size-fits-all approach, with the majority of clients given the same advice. It involved borrowing significant amounts to fund investments in the equity market.
The strategy has been described as “double gearing” because it involved borrowing against the security in the home and then taking out a margin loan.
If stock prices fell clients were encouraged to invest more, often using more debt, because stocks were “cheap”.
Some of the clients were retired or approaching retirement, and were particularly vulnerable to losses on account of having little income and few assets apart from their family home and limited superannuation.
ASIC took the Storm directors Emmanuel and Julie Cassimitis to court, alleging that they breached their duty as directors by implementing an advice model that failed to take the personal circumstances of investors into account.
It also alleged that they operated an unlicensed managed investment scheme.
The Federal Court found that they had breached their duty as directors and that storm had provided inappropriate advice to certain investors.
Lenders developed close relationships with Storm. According to an article by Paul Barry in The Monthly, Macquarie Bank drew up a “working alliance” document, in which it agreed to charge Storm clients lower interest rates, allow them higher loan-to-valuation ratios and provide extra time to meet margin calls.
CBA also offered Storm clients lower rates and higher LVRs and in 2007 sponsored a event that Storm put on in Italy for favoured clients.
CBA had more than 2000 Storm clients, Macquarie had about 1000 and Bank of Queensland around 370.
After the various cases were settled, the funds for compensation provided by CBA amounted to $268 million, made up of $132 million under a resolution scheme and $136 million under a settlement with ASIC. Macquarie settled for $84.4 million and BOQ paid out a total of $19.7 million, with $17 million of this paid to BOQ customers.
Last year’s Westpac settlement demonstrated that the question of whether lenders are liable as inked credit providers remains up in the air.
The representative proceeding was brought by John and Glenda Lee. They claimed that Westpac breached various terms of their home loan agreement, and the home loan agreements and business loan agreements of some or all of the group members.
They also claimed that by entering into the loan agreements Westpac engaged in unconscionable conduct, which resulted in breaches of the ASIC Act.
And they claimed that Westpac was a “linked credit provider” of Storm, under the Trade Practices Act, such that it was liable for Storm’s breaches of contract. In relation to the provision of investment advice.
In a commentary on the case, Barry.Nilsson Lawyers special counsel Belinda Randall says the bank’s case was that it was merely one of a number of lenders to Storm clients. It argued that if it had performed the “duties” which the applicants alleged it owed them and declined to lend them money, the most likely consequence would have been that the applicants would have borrowed from another lender and invested in the same “grossly improvident scheme”.
The bank rejected the argument that it owed a duty to advise people who approached it for finance not to follow the financial advice provided by third parties.
In its ruling, the Federal Court said: “The amount payable by Westpac under the settlement agreement is a relatively small sum in the context of actions of this nature. This probably reflects and assessment by both parties as to the strength of the applicants’ case.”
At the time ASIC commenced legal proceedings against various parties, in 2010, then ASIC chair Greg Medcraft said one of his goals was to clarify the role of the lenders in arrangements such as the one Storm set up. What the latest case appears to show is that ASIC has not achieved that goal.
